It might challenge for business owners to figure out how to get access to expensive equipment. There are two basic ways to get the equipment your company needs to sustain, expand, and/or grow its operations: lease or loan.

What is Equipment Lease Financing?

An equipment lease is a contract with a vendor to rent business equipment for a set amount of time in exchange for a monthly payment. You do not own the equipment throughout the lease term or when it ends, so you must return it, extend your lease, or purchase it at that point.

What is an Operating Lease?

An operating lease is similar to a regular lease in that there is no ownership at the end of the lease and the payments are recorded as a rental expense rather than an asset. A finance lease (also known as a capital lease) allows a (usually large) company to deduct depreciation and interest while also having the option to purchase the equipment at the end of the lease because payments are applied to the cost of the equipment. The APR on a finance lease is usually greater than on an operating lease.

What is Equipment Loan Financing?

An equipment loan is a type of business loan that allows you to buy equipment right away to suit your organization’s needs while making fixed monthly payments on the loan. You own the equipment outright once we paid your debt off. Because the loan is secured by the equipment, it is usually easier to apply for and get approved than other types of business loans. Banks typically lend 80-100 percent, requiring a down payment at loan closing, and the duration can range from three to seven years, however variable financing periods are available to best meet your business condition.

What Equipment Can You Finance?

Company vehicles, manufacturing machinery, IT equipment (computers, servers, phones), medical imaging equipment, restaurant appliances, office furniture, and electric vehicle (EV) charging stations are all examples of how you might employ equipment financing.

Consult a Tax Professional

Both options may provide tax benefits, so talk to your tax advisor about how to get the most out of them depending on which path you take.

What to consider when deciding between Equipment Leasing versus an Equipment Loan

As a business owner, you should consider how long you want to use the equipment, whether owning it is necessary, and how much you can afford to pay on a monthly basis.

Things to think about while deciding between equipment leasing and an equipment loan:

• Purchase price
• The amount to be financed
• Annual depreciation
• Tax and inflation rates
• Monthly lease costs
• Equipment usage
• Ownership and maintenance costs

Equipment Leasing Pros and Cons

Equipment Leasing Advantages 

• Ability to upgrade to newer models/technology as old equipment wears out.
• There’s no requirement for a down payment or collateral, which means more money for other things and no risk to your business or personal assets.
• There are no repair costs because the lessor is responsible for maintenance.
• Application process is simple, and equipment is often available in a short period of time.
• There are lease-to-own and other flexible lease alternatives available.
• Rental payments can be deducted from your taxes.

Equipment Leasing Disadvantages

• The potential to pay more over the course of the lease than if you bought it outright.
• At the end of the lease term, you must return the equipment.
• Equipment commitment (and payments) until lease term is completed.

Equipment Loan Pros and Cons

Equipment Loan Advantages

• Ease of application (often less documentation than standard business loans) and qualification because equipment loans are self-collateralized, which means you won’t have to put up any additional assets.
• The cost of a loan over time is usually less than the cost of leasing.
• When you own something, it becomes an asset on your balance sheet until you decide to sell it or get rid of it.
• Make changes to the equipment to suit your needs.
• Make on-time payments to establish business credit, which can help with future financing.

Equipment Loan Disadvantages

• A 20% down payment is usually required for a loan.
• You own the equipment, regardless of how old it is or how well it works.
• Maintenance of the equipment is your responsibility.
• Long-term debt for a company loan may affect your capacity to obtain additional credit or funding in the future, as well as increase your chance of default.

There When You Need Us

Contact any of our business bankers today to discuss your equipment financing needs.